Latest Stories

Government Loses Son of Boss Tax Shelter Case

In a
rare tax shelter loss for the IRS, a federal district court
has allowed a taxpayer to offset income with losses from a
“son of boss” transaction (Sala, No.
05-cv-00636-LTB (D.C. Colo. 4/22/08)).

The taxpayer
in the case had over $60 million in income in 2000 but
claimed losses on various long and short options on foreign
currencies that virtually eliminated his tax liability. The
Service sought to characterize these transactions as
fraudulent but lost on that issue in an earlier round of
litigation (Sala, No. 05-cv-00636-LTB-PAC (D.C.
Colo. 5/1/07)). The IRS then sought to use the Sec. 752
regulations to portray the transactions as lacking in
business purpose and having no profit potential.

The
Service focused on one portion of the investments in one
year (2000) to argue that the taxpayer entered into the
transactions purely as a tax dodge. However, the court
disagreed. The court looked at all the taxpayer’s
transactions over a five-year period—including transactions
that had no tax benefit—and held that the taxpayer had a
“reasonable possibility of profits beyond the tax benefits”
and had a “business purpose other than tax avoidance.”

Furthermore, the court held that the government could not
retroactively apply the Sec. 752 regulations to the
taxpayer’s case (the regulations were finalized in 2003).
Under Sec. 7805, regulations may be applied retroactively
only in very specific situations. Instead, the court found
the Sec. 752 regulations to be “overly broad” and not to be
legislative regulations requiring deference under
Chevron U.S.A., Inc. v. Natural Resource Defense
Council, Inc., 467 US 837 (1984). The court
characterized the Sec. 752 regulations as “Treasury’s
attempt to legislate” and “an attempt to bootstrap the
government’s litigating position with respect to ‘Son of
Boss’ cases.” The court therefore held Regs. Sec. 1.752-6 to
be unlawful and set it aside. (However, the regulations had
earlier been upheld by the Seventh Circuit in Cemco
Investors LLC, No. 07-2220 (7th Cir. 2/7/08).)

The winners of The Tax Adviser’s 2016 Best Article Award are Edward Schnee, CPA, Ph.D., and W. Eugene Seago, J.D., Ph.D., for their article, “Taxation of Worthless and Abandoned Partnership Interests.”

Don’t get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. Tax Section membership will help you stay up to date and make your practice more efficient.